Op Ed: Drivechains Could Kill Off the Altcoin Market

Sidechains have been viewed as Bitcoins way of dealing the altcoin market since 2014, when a proposal for a two-way peg between two different blockchains was first proposed in a public setting. Three years later, it appears that drivechains, which are a specific way of implementing sidechains, will be the way in which extensions for Bitcoin are rolled out.

Sidechains remove the need for altcoins by allowing bitcoins to be effectively transferred from one blockchain to another. This means the bitcoin token can be used on any type of blockchain that bitcoin holders demand into existence.

Drivechains were designed by Bloq Economist Paul Sztorc, who started working on the idea after the lack of progress on sidechains slowed down his own project, a decentralized prediction market known as Bitcoin Hivemind.

In Sztorcs view, the security model for drivechains is not much different than that of the main Bitcoin blockchain because the funds on the drivechain are held in escrow by bitcoin miners. Some developers, such as Peter Todd, have shared technical concerns with merge-mined sidechains in the past, but this concept is likely going to be tried out in the wild, whether the contributors to Bitcoin Core like it or not. Sztorc has also attempted to address these technical concerns through the use of blind merged mining.

In terms of the risk of miners stealing the funds held in escrow, Sztorc has pointed out that a similar risk already exists in Bitcoin: A cartel of miners could theoretically defraud a bitcoin exchange by selling bitcoins on the exchange and then later rewriting the chain history in a way obscures or erases the original deposit so that it appears it never took place.

Drivechains can be added to Bitcoin via soft forks, which means they are backward compatible. If there is sufficient demand for a specific type of drivechain, miners should be happy to mine on the additional chain in order to generate more revenue by way of transaction fees.

Features of popular drivechains could theoretically be soft-forked into Bitcoin by way of an extension block or some other measure, but its unclear if this would even be necessary.

The three main niches that have gained interest from altcoin speculators are microtransactions (lower transaction fees), smart contracts and privacy.

Both Ethereum and Litecoin are said to be useful alternatives to Bitcoin because they have lower transaction fees. One of the first intended drivechains is one with bigger blocks which would allow users to transact with lower fees in a manner that does not negatively affect the decentralization of Bitcoins main chain.

Although its still unclear if there is much substance behind the drastic rise in Ethereums market cap, RSK has built a sidechain focused on complex smart contracts that is a hybrid between a drivechain and a federated sidechain. The RSK platform is currently pegged to Bitcoins testnet, and it is expected to launch on mainnet later this year.

In terms of privacy, there are intentions to add a MimbleWimble sidechain to Bitcoin, although the mechanism that will be used to peg the sidechain to Bitcoin is unclear at this time. In addition to MimbleWimble, its also possible that a Monero, Zcash or other privacy-focused sidechains could be released if there is enough demand.

There is a full list of sidechain projects available on the Drivechain website.

While drivechains are likely to drive out the need for altcoins, its still possible that alternative digital assets that are not attempts at creating a new form of money will exist.

Sztorcs own project creates a new token, votecoin, which is required for the decentralized prediction market to work. With this setup, bitcoin is used as the transactional currency while votecoins are used as a sort of stake in the network to get the incentives to work properly.

To me, its unclear how often these sorts of new tokens will be needed, but there should be no reason for competitors to bitcoin as a form of digital money to exist.

One last thing to keep in mind is that a chain split in Bitcoin could invalidate the hypothesis laid out in this article. If there is a split, then the network effects around Bitcoin could be weakened, which would open the door for an alternative cryptocurrency to take Bitcoins place.

The supporters of the SegWit2x proposal intend to activate a hard-forking increase to Bitcoins block size limit later this year, but it is extremely unlikely that this change will be implemented in Bitcoin Core, which means a chain split is a possibility.

The negative effects of such a situation would depend on the severity of the split and how the market reacts.

If a big block drivechain is prepared in time, it may be able to decrease the attraction some in the Bitcoin ecosystem have toward a hard fork.

Thank you to drivechain developer Patrick Murphy for answering a few questions during the writing of this article.